Month: December 2012

Intending to write a series of articles about various business cycle theories, I encountered a book originally published in 1978 and copyrighted in 1996. The title of the book is “The Austrian Theory of Trade Cycle and Other Essays”. It was edited by Richard M. Ebeling. The book has six essays and the contributors include F. A. Hayek, Ludwig von Mises, Murray Rothbard, Gottfried Haberler, and Roger Garrison.

The six essays are:

Introduction: The Austrian Theory in Perspective by Roger W. Garrison

The Austrian Theory of the Trade Cycle by Ludwig von Mises

Money and the Business Cycle by Gottfried Haberler

Economic Depressions: Their Cause and Cure by Murray N. Rothbard

Can We Still Avoid Inflation? By Friedrich A. Hayek

The Austrian Theory: A Summary by Roger W. Garrison

Let me start with essay number 4, “Economic Depressions: Their Cause and Cure” by Murray N. Rothbard. It has 26 pages.

My strategy is to write about any idea that I personally consider striking and important without regard to the total structure of the essay. Of course, I will do my best to be considerate about the essay’s structure. However, that’s not my primary concern. And here are the ideas I considered important:

The reality of the world of euphemism

Socialism’s disguise

Three economic questions

Euphemism

Reading the first paragraph, I encounter a difficult word – euphemism. Usually, encountering an unfamiliar term, I do not go immediately to the dictionary to look for its meaning. This kind of reading slows down my goal to finish an essay or a book. However, I could not help myself, but look for its meaning for I consider the word central to understand the entire essay. It’s the basic assumption of the writer.

Paraphrasing the definition I encounter in the web, I understand euphemism as a way to make offensive words acceptable. This could be done both negatively and positively. As positive expression, this could be considered polite. However, as negative expression this is a good strategy to hide something and if done using the mainstream avenues of information could be used as a tool of misinformation and social control.

The examples from this site of euphemism are surprising. I will just select few: “passed away” instead of “died”; “correctional facility” instead of “jail”; “ethnic cleansing” instead of “genocide”; “relocation center” instead of “prison camp”; “pregnancy termination” instead of “abortion”, and; “on the streets” instead of “homeless”.

Remember who use and throw these words out there. Think also what the intention behind the replacement of words. Who use those words and for what purpose? This is a relevant question especially in our generation where almost all the things we believe to be true are in reality utilized to control the mind of the majority so that the powers that pull the string could do their own thing unnoticed. This is particularly true in the writing of history.

Murray N. Rothbard used the word “euphemism” in the sense we describe above and this is most evident in the field of economics. The terms “depression” and “recession” are too strong and offensive for the public. Better replace the terms with acceptable ones. In this task, professional economists succeeded. Economic reality is hidden from the public and “the planners” go on with their usual business of planning people’s lives. If you do not believe this to be true, for your children’s sake, take a serious look once again. You do not have any excuse for not knowing for the Internet is before you. Reality is just a click away.

Instead of “depressions” and “recessions”, Murray Rothbard claims that “New Economics” formulated new terms. These are “downturns”, “slowdowns”, and “sidewise movements”. Praise the Lord! We will no longer have depressions and recessions! Professional economists have created wonders!

Keynesian Socialism Disguising as “Enlightened Free Enterprise”

After reading the first few paragraphs of the essay, I encountered familiar and intriguing ideas particularly relevant to our present global economic situation. Karl Marx is the dominant personality that influenced the prevailing perception that business cycle is an inherent flaw within free market capitalism. Most people are unaware that by accepting this thesis, they already embraced the Marxist’s interpretation.

However, economists like David Hume and David Ricardo refused to blame the free market for business cycle. They identify the critical role of commercial banks and government intervention on the economy as the real source of economic depression.

Governments of the world operate on the Keynesian economic framework. Based on this framework, government intervention is justified to address both inflation and recession.

Based on Keynesian framework, inflation is caused by excessive public spending. It is the solemn duty of the government therefore to find a way to force people to spend less. The strategy of course is difficult to detect and visible only from an Austrian lens.

Moreover, for Keynesian, recession is caused by insufficient private spending. To address this problem, the government has to increase spending.

Except for the above solutions, other Keynesian remedies include bailing out bankrupt firms, inflating credit, propping up prices, and bolstering wage rates above the free-market level.

On the other hand, from Austrian perspective, government interventionism is the primary cause for economic decline. The idea therefore of coming to the government to aid the economy is insane. Rothbard argued that in the recent past this kind of acts on the part of the government was designated as socialism. Most people are not aware that socialism is the air we breath in the name of course of “enlightened free enterprise”.

Three Critical Problems

Any theory trying to explain economic depression must answer three critical problems:

Why business cycle exists?

Why all entrepreneurs lose their forecasting ability at the same time during economic recession? What’s the real reason for this sudden widespread of entrepreneurial blindness?

Why capital good industries suffer the most in time of depression compared to consumer goods industries? And why the same industries soar in time of economic boom?

Both the Marxist and the Keynesian schools provide insufficient answers to the above problems. The answer provided by the Austrian school is now considered the most reliable. David Ricardo answered the first question. Ludwig von Mises completed the answer in his book “Theory of Money and Credit” published in 1912. Rothbard still considered this book as the best book on the theory of money and banking.

For Austrian economists, inflation and depression are not inherent flaws within free market capitalism. It is the result of the acts of “enlightened free enterprise” more accurately described as socialism or government interventionism.

For Mises, the proper actions of the government in time of depression can be enumerated as follows: never bail out business firms in trouble, do not intervene with laborers’ wage and price of producers’ goods, do not encourage consumption, do not increase government expenditures, and cut the government budget. It is better if the government encourage more saving rather than more consumption. But the best act on the part of the government is to do nothing, to take her hands off from the free economy. Let the laissez-faire work. Rothbard wrote: “The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget” (p. 89).

Reading the last paragraph of the essay, I see that the only way not to fall victim into the world of euphemism is to recover the Austrian explanation of the business cycle. Once we see this thing happening, socialism’s real color will be exposed and Rothbard foresaw that the government will certainly withdraw its hand from the free market economy.

Let us hear what Rothbard has to say about this intellectual recovery:

“Once again, the money supply and bank credit are being grudgingly acknowledged to play a leading role in the cycle. The time is ripe for a rediscovery; a renaissance of the Mises theory of the business cycle. It can come none too soon; if it ever does, the whole concept of a Council of Economic Advisors would be swept away; and we would see a massive retreat of government from the economic sphere. But for all this to happen, the world of economics and the public at large, must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years” (p. 91).

It is good to know that the Austrian Business Cycle Theory has finally reached mainstream economists. The response varies. Thanks to 2008 global financial crisis. To me this is an indication of the fulfillment of a foresight.

Beginning 2010, I have been encountering in the web that existing economics will undergo transformation. Mainstream economists can no longer afford to ignore the voice of the Austrian school.

A paper written by Jerry H. Tempelman is an example of the influence of such voice. His topic is the “Austrian Business Cycle Theory and the Global Financial Crisis: Confessions of a Mainstream Economist”. He wrote it in 2010.

The paper is structured around three parts: the identity of those who oppose the business cycle theory, the summary of the theory, and the influence of the theory on several mainstream economists. I just want to follow this order in sharing my own understanding of Tempelman’s paper.

Opponents of Austrian Business Cycle Theory

Milton Friedman tops the list of those who oppose the Austrian Business Cycle Theory. For Friedman, the theory does not provide an accurate explanation of economic recession. It lacks verifiable evidence in actual practice.

Unfortunately, Friedman was not able to witness the 2008 global financial crisis. He passed away in 2006. He was no longer there to witness the specific fulfillment of the theory.

Allan Greenspan is another key personality that opposed the Austrian school. He is a Keynesian. Due to his influence, the voice of William R. White, an Austrian influenced economist was ignored.

Prior to 2008 crisis, White predicted an economic crisis that would result from real estate bubble. His warning was not seriously taken. He actually identified central banks as primary responsible for the crisis due to monetary easing policies. The response to White changed when his prediction happened.

Overview of Business Cycle Theory

Tempelman acknowledged that among several schools of economics, the Austrian school is now considered the most reliable source of interpretation of the 2008 global financial crisis with its business cycle theory. He gave an overview of this theory. It is good that he distinguished between two types of economic booms – sustainable and unsustainable. I find it very helpful.

An economic boom is considered sustainable if it is an outcome of escalation in investment funded by growth in saving. On the other hand, it is unsustainable if the resulting escalation in investment is derived from credit expansion by monetary authorities. This kind of economic boom will certainly end in bust.

Ordinary people find it difficult to identify the dynamics that follow after credit expansion. They include lending money at low interest rates, distortion of vital economic information, negative impact on entrepreneurial decision, and unproductive use of capital. The end of the process is economic decline.

The Austrian Business Cycle Theory described above was proven true in the 2008 economic crisis. The credit expansion and mal-investment that characterized the years prior to 2008 was the primary cause for the decline both in financial market and the total global economy.

The Influence of Business Cycle Theory on Mainstream Economists

The names of mainstream economists mentioned in the paper include William Dudley and Paul Krugman. The Economist is also mentioned. Other mainstream economists using different methodology and whose economic researches are classified as “on the cutting edge” are also identified.

Tempelman noted William Dudley’s analysis of the Federal Reserve has many features common in the Austrian school. Paul Krugman also voiced out his criticism of the Fed for its ability to create boom and bust, an idea borrowed from the Austrian school. The Economist even cited the analysis of Ludwig von Mises criticizing the Fed’s monetary stimulation policy. The economic website also recognized that numerous qualities from Austrian business cycle theory characterized the economic decline both in the US and Japan.

Mainstream economists who utilized different methods include Taylor (2007), Jarocinski and Smets (2008), Smithers (2009), and Vogel (2010). All of them, though they used different approach arrived to a conclusion almost similar to the ideas of the Austrian school. Taylor for instance identified the correlation between the Fed’s monetary policy and the boom in the housing industry. Jarocinski and Smets confirmed this findings using “Bayesian vector auto-regression”. Furthermore, Smithers identified the connection between the irresponsible action of central bankers and global financial crisis. Finally, Vogel observed a sequence of events leading to financial crisis. It all started with the Fed’s monetary policy followed by 2001 economic recession leading to house bubble, which collapse finally resulted to the global crisis.

Tempelman mentioned three among cutting edge mainstream economic research. The first type of research focused on financial leverage and liquidity. Someone mentioned in the paper that a growing body of literature has been focused on this important subject. The works of Tobias Adrian and Hyun Song Shin (2009) is just one example of this type of research. Again the works of these scholars appear to be an echo of the message of Austrian business cycle theory.

Another type of research resonates the voice of the Austrian school is simply focused on liquidity. Brunnermeier (2009) argues that the face of macroeconomics will certainly change and a new economics will emerge considering the contribution coming from the macro, the micro, and financial economics.

The third type of cutting edge research concentrates on behavioral interpretations of business cycle. This one is considered complementary to Austrian Business Cycle Theory.

Conclusion

Tempelman wrote that since 2008 crisis, Federal Reserve officials have shown some “positive signs” acknowledging the mistake of their monetary policy. They admitted that low interest rates for too long does not really help, but has made the crisis more severe.

Some ideas for monetary reform are now considered. Unfortunately, in spite of the accuracy of the Austrian school, its proposal is still considered too radical and therefore rejected. The proposal includes closure of central banks, return to gold standard, free banking, and monetary competition.

Personal Response

Immediately after the crisis, central banks escaped public blame. All fingers are pointing to free market capitalism. That’s the power of mainstream media. Statist interventionism is doing its best to find a scapegoat.

Thanks to alternative media and bloggers. Thanks also to the influence of Ron Paul. Central banks now are exposed. In time, the role of statist interventionism on the global crisis will also become part of mainstream consciousness.

Regarding the paper, I observe that despite the fact that core features of Austrian Business Cycle Theory were fulfilled in 2008 crisis, mainstream economists are still hesitant to acknowledge the direct influence of the Austrian school in their economic interpretation. This is my personal impression after reading the paper. I think this observation also applies to Templeman’s position. Even though he was in favor of the Austrian school, somehow he remains reserve in the way he presented his material.

As a whole, I appreciate the fact that the Austrian Business Cycle Theory is making an impact among mainstream economists. How I wish that such impact would lead to a thorough study of the Austrian school of economics and the abandonment of the Keynesian economic framework. I also wish to see the fulfillment of George Reisman’s vision in our generation: the spread of Austrian economics literature into the library of universities worldwide. I believe that such education would enable economists to see the real colors of dominant ideologies behind our present political and economic turmoil around the world. I am hopeful that the exposure of the schemes of socialism and statist interventionism would lead to a new appreciation of genuine free market capitalism. And this would mean a better future for global economy based on personal liberty, honest money, and private property.

Distracted is an appropriate description for me this month of December for I really find it hard to concentrate writing articles for this site. I have two topics in mind, which I find interesting, but I could not push myself to start writing. These are about the approaching events on January 1, 2013 and comparison between Obama’s victory speech and Ron Paul’s farewell speech from US Congress. I have eight days more to write about the first topic. I think the second topic can wait.

I prefer trolling instead of writing, that’s my struggle. And then suddenly, while trolling on the net I just bumped one thread forum about RH bill. I had exchanges of ideas with the initiator until discussing about the topic in economic terms. At the middle of the discussion, the thread initiator shared to me a link to a Christian website about economics and business.

After reading a dozen of articles from that website, I felt dissatisfied with the shallowness of the content. Such dissatisfaction afflicts me every time I read economic and financial articles from Christian sources. There are exceptions of course. North is one of them.

Most of the writers I encountered are simply promoting their books. It appears to me that these writers are unaware that anyone could access content far superior and more accurate at no cost.

Comparing the content of Ludwig von Mises and LewRockwell with Seven Mountains and Center for Christian Business Ethics Today, I could not control my dissatisfaction, and that’s why I am writing this article. I think these latter sites could have improved their “theologizing” if they would just devote some time learning first the Austrian school of economics.

Despite my unfairness in my comparison and my failure to see the differences in context of the two types of content, I am still craving for solid information coming from Christian writers. How I wish that the “authority” in Christian circles should stop their half-baked analysis and start thinking hard about global finance and economy. Why not start learning the Austrian school of economics?